Presented by: Brian Ridderbush

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Benefits-Based Contracting Funding new IT
initiatives with little to no budget

• Presented byBrian Ridderbush
• Revenue Solutions, Inc.

Presentation byTerry Garber, George Manley
John Taylor

• No funds? How to have your project and Revenue
  too! Terry Garber

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Agenda

• The Problem
• The Solution
• Key Issues to Consider
• South Carolina Experience
• Lessons Learned
• SC Legislation
• Final Thoughts

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The Problem Statement

• It takes funding to make funding IT initiatives
  can significantly improve compliance and
  collections for state revenue agencies
• Funding IT initiatives with large capital budgets
  is difficult to sell even in a good economy
• A time of financial stress 47 of 50 states are
  experiencing budget shortfalls, cuts to current
  service levels, mandatory furloughs, and
  performance targets (oh my!). Projections are
  awful!

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Funding State Programs .. A New Challenge!
Source Center on Budget and Policy Priorities,
May 18, 2009
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Projected State Budget Deficits
Source Center on Budget and Policy Priorities,
May 18, 2009
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The Solution

• State Revenue agencies are in a unique position
  to generate revenue
• Departments of Revenue can leverage their revenue
  generating capabilities to fund IT initiatives
  that can enhance revenue production

• A performance-based procurement, also known as
  benefits-based funding, enables a state
  Department of Revenue to pay for IT projects out
  of the additional funds collected and directly
  attributable to the project

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The Solution

• A performance-based procurement is considered a
  win/win for both the state and the vendor
• The state only pays for projects that are
  implemented successfully and show a proven return
  on investment
• The vendor is able to win business that would not
  have been available without the special funding
  mechanism
• The vendor only wins if they deliver the promised
  results
• Puts skin in the game for both parties and
  creates a true partnership approach

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The Solution

• Types of performance-based procurements
• No Cap vendor takes a share of all benefits
  during a specified contract period.  Vendor is
  incented to help drive high results.
• Capped vendor has a fixed fee that is paid from
  benefits. 
• Cost savings vendor is paid out of the
  projects cost savings (people, office space,
  equipment).

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The Solution

• States that have used performance-based
  procurement successfully for IT projects
• California
• EDD, FTB and BOE
• Hawaii
• Missouri
• Kansas
• South Carolina
• Virginia
• Texas
• New Jersey
• New York
• One of the first performance-based projects was
  done by FTB nearly 20 years ago

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Issues to Consider

• What type of project best lends itself to
  performance-based procurement?
• Projects that provide direct, measurable revenue,
  such as in Audit and Collections compliance
  programs
• Projects that provide indirect revenue, such as
  Integrated Tax Systems
• Compliance components can carry the rest of the
  program
• Projects that generate a cost savings (labor,
  equipment, floor space, maintenance)
• Examples EDD Tax re-Engineering and
  Modernization (TEAM), California DMV

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Issues to Consider

• Most states require special legislation
  authorizing the Department of Revenue to use
  performance-based procurement
• Remember to include the ability for the revenue
  agency to reimburse its own costs outside of
  vendor payments, such as additional staffing
• Legislation should extend beyond the vendor
  contract period, to provide funding for the
  program on an ongoing, long term basis

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Issues to Consider

• The vendor has needs that must be considered
• Vendors will make up-front investments in the
  project and may not get paid for months after the
  project start
• The vendor needs the revenue stream to get
  started as soon as possible in order to recoup
  those up-front investments and reduce working
  capital costs (i.e. internal interest charges)
• Vendors will structure a project such that there
  are early wins that can start generating
  revenue as soon as possible after start up

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Issues to Consider

• The development and implementation of the
  methodology to measure the increased revenue is a
  project in and of itself (but there are many
  examples to borrow from)
• Identifying initial revenue baselines can be more
  difficult than one might expect
• The Department of Revenue should be prepared to
  invest business and IT resources in order to
  implement the measurement methodology
• Agency Senior Management and Internal Audit must
  buy into the methodology and certify the
  benefits each measurement period

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Issues to Consider

• Contracts need to be structured such that there
  are clear client responsibilities and
  expectations they will deliver on resource and
  schedule requirements
• Additional agency-supplied resources such as
  contact center staff, Collections staff, phone
  lines, paper and printing likely will be needed
• Project success depends on agency commitment to
  maximize revenue/benefits
• Competing projects, changes in administration,
  and budget cut backs can jeopardize success

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Issues to Consider

• Client/Vendor relationship in a performance-based
  procurement
• Both parties in this arrangement are dependent on
  the other in order to meet their objectives
• The DOR needs to increase revenue for the State
• The DOR wants to procure new technology that will
  enable them to be more efficient and replace
  outdated technology and processes
• The vendor needs to recoup the up front
  investment and make an overall profit on the
  engagement
• Due to these dependencies, successful
  performance-based procurements work best when the
  parties treat the relationship as a true
  partnership
• Neither can succeed in their objectives without
  the commitment of the other
• Both parties have to open the books

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South Carolina Experience

• In 2003, SC DOR needed revenue to fund
  initiatives
• In 2004, a revenue projection study was completed
  and a Request for Proposals issued
• In 2005, the SC DOR implemented a five-year
  performance-based technology initiative the Data
  Warehouse Project to Identify Uncollected
  Revenues
• Data Warehouse solution generated the additional
  revenue to pay the vendor for hardware, software
  and services
• The 9 compliance programs implemented focused on
  individual and business tax discovery (non-filers
  under-reporters), audit scoring and collection
  risk scoring
• 5 programs were measured

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South Carolina Experience

• Project Results
• Original revenue target 98 million over five
  years
• Actual revenue 113 million with three months to
  go
• Vendor costs 20 million
• Direct agency costs 10 million
• Net revenue to state 83 million
• Increase in voluntary compliance
• Current project underway to measure
• It is real!

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South Carolina Experience

• Project Results
• DOR has ownership of a strategic asset in the
  form of an enterprise-wide data warehouse
• DOR is leveraging the data warehouse for
  compliance and other business intelligence
  initiatives
• Data in the warehouse is being used to support
  executive dashboard reporting, taxpayer education
  initiatives, operational performance measurement
  and more!
• The warehouse has enabled DOR to be a more
  data-driven organization than was ever possible
  before the project

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Lessons Learned

• Do not underestimate the investment of the agency
  in the project
• Agency must invest resources in revenue recovery,
  taxpayer service, and benefits measurement
  components of the project
• With legislative support, SC DOR also received
  special funding to augment their compliance staff
• It is not just technology that provides the
  return on investment, staff are needed as well
• Auditors and Collectors have a direct impact on
  enforced collections

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Lessons Learned

• Communication of the project to agency staff
• There may be a perception at the staff level that
  the credit for their work is going to the vendor
  or project, rather than to compliance staff
• Communication of the project arrangement to
  agency staff and the win/win nature of the
  project can help reduce some staff resentment
• Communication of the project to senior management
• Keep senior management apprised of benefit levels
  and other wins to maintain support
• Communicate potential issues promptly, such as
  taxpayer complaints or unexpected expenses

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Lessons Learned

• External Communications are also critical
• Proactive public communications with spin of
  catching tax cheats helps deflate concerns of
  big brother data gathering
• Support from Governor and Legislature needed for
  upfront funding of agency supplied resources or
  fund through the program

• Increased noticing generates receivables! Impact
  of project on state Receivables to Collections
  ratio must be communicated to state
  Treasurer/Comptroller and managed throughout the
  life of the program

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Lessons Learned

• Compliance programs cannot run on auto pilot!
• Selection criteria and liability calculations
  must be continuously refined to avoid erroneous
  notices which can lead to taxpayer complaints and
  bad press
• Program run speeds and noticing volumes must be
  continuously managed
• Maintain acceptable receivables levels
• Work within agency capacity for processing,
  printing, postage budgets
• Work within agency capacity to handle volumes of
  phone calls and letters from taxpayers

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Legislation Example

• South Carolina Proviso
• The Department of Revenue is authorized to
  contract with private industry to establish data
  mining and data warehousing capabilities within
  the department, to enhance compliance and
  collections.  Such arrangements may include
  payment from the increased revenue generated by
  such capabilities. The department shall be
  allowed reimbursement of costs associated with
  administration of this proviso from the data
  warehouse generated collections.  This amount may
  be retained and expended for budgeted
  operations.

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Final Thoughts

• A performance-based procurement is a very
  effective way to fund agency IT project(s)
• Performance-based projects have been quite
  successful
• Benefits have reached projected targets and been
  able to fund the project and provide additional
  revenue to the state after the project has
  concluded
• Performance-based procurements require a
  commitment at the executive management level of
  the agency
• The vendor may include language in the proposal
  that will require certain commitments from
  management to provide support resources and to
  change processes and procedures in order to
  generate the additional revenue
• Vendor and agency must work together to construct
  a successful project considering strengths and
  weaknesses of the agency

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Revenue Solutions, Inc.

• Incorporated in May 1996
• Headquartered in Pembroke, MA with Solution
  Centers in Roseville, CA and Charlotte, NC
• Dedicated exclusively to providing products
  services to tax agencies
• Over 220 tax professionals with 800 combined
  years of revenue systems consulting
• Deep tax administration domain expertise
• Software Solutions for Integrated Tax and
  Integrated Compliance Management (Data
  Warehousing, Audit, Collections, Fraud)
• Committed to client partnerships in delivery of
  projects

• Mission Statement
• Assist revenue agencies to maximize collections,
  increase compliance, improve customer service and
  streamline operations through the use of enabling
  technologies, in particular, integrated tax and
  tax data warehouse solutions

www.RevenueSolutionsInc.com
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Questions and Contact Information

• John Taylor
• Senior Administrator and Chief Financial
  Officer
• [phone]
• taylorj_at_sctax.org

• Brian Ridderbush
• Senior Manager RSI
• [phone], x400
• BRidderbush_at_RSImail.com

• Terry Garber
• Manager, New Application Development
• [phone]
• garbert_at_sctax.org

• George Manley
• Senior Manager RSI
• [phone]
• GManley_at_RSImail.com